The Silicon Black Swan Event
- in Business Models
There’s a very good one act play by David Greig called “the Letter of Last Resort” (which you can listen to here). It’s based on the premise that one of the first tasks of any new Prime Minister in the UK is to write a set of letters that are sent to the Captains of our nuclear submarine fleet. In the event of their losing contact with the country, it instructs them what they should do. Options include retaliating, by firing their nuclear warheads at whoever they believe were the perpetrators, surrendering, or sailing to some other country and offering them our nuclear missiles.
It’s a gloriously far-fetched political black comedy, based on a modicum of truth. However, it’s likely that a very similar debate is taking place in a boardroom in Taiwan at the moment, as TSMC and other leading silicon chip companies debate what they do in the event of a Chinese invasion. I suspect there’s a parallel one being conducted within the Taiwanese Parliament. Should these plans ever need to be realised, it will have very serious consequences on everyone’s favourite technology and put a stake in the heart of the smartphone industry.
Since the actions at the end of the second world war, with the subsequent break between the mainland Chinese Communist Party and the regime in Taipei, China has pursued the goal of returning to one nation. It’s a conflict which has been simmering for around 75 years. I first noticed it when I flew to Taipei around thirty years ago. Alongside the signs for ground transportation and toilets in the airport, there were prominent signs for the air-raid shelters. Since then, the political tensions have warmed and cooled, but there are signs that they are ramping up again. Since Russia’s invasion of Ukraine, it’s becoming obvious that the unthinkable may become more thinkable than anyone had thought.
What makes the situation in Taiwan more worrying for many is the realisation that Taiwan has become better than anyone else in the world at making bleeding edge silicon chips, in particular, the chips which power the most popular smartphones. TSMC (Taiwan Semiconductor Manufacturing Company – an example of branding that comes from the same stable as BMW) has diligently pushed the limits of extreme ultra-violet lithography to the point where it is the only company capable of manufacturing the chips which are used in our top end smartphones. Which means that every major phone manufacturer depends on TSMC.
Depending on which analyst you’re talking to, TSMC are around five years ahead of any of their competitors anywhere else in the world. When they were founded, they realised that as a chip foundry that made chips which other companies designed, they had to be better at process than anyone else and have dedicated themselves to that goal. The bleeding edge for chips is currently making features as small as 3nm (three nanometres is less than one ten-thousandth of the width of a human hair). Not only does it need highly complex equipment, but an immense amount of experience, both in using it and designing the facilities where it is used. TSMC have cracked it, which is why their services are in such demand.
US and European chip companies have generally been perfectly happy to rely on TSMC’s expertise, saving themselves the cost of building expensive wafer fabrication facilities, as well as investing in the process development required to achieve commercially viable yields from this extremely difficult technology. The only country showing much attention to mounting a challenge was China, spurred on by the US’s increasingly onerous level of sanctions against China’s high-tech companies. That led to the US Government having a “Sputnik moment”, with a grand plan to accelerate a return to chip manufacturing in the US, whilst further restricting Chinese companies’ access to the production equipment needed to move to a 3nm process. Instead of a space race, last year’s CHIPS Act planned to direct $280 billion in spending over the next ten years to bolster home ground chip manufacturing.
Most of this can be read as the politics of trade barriers, heightened by fears of China taking the lead in technology. Covid helped the Congressional hawks by pointing out the danger of having single points of supply, so money is flowing to set up new wafer fabs on US soil. But it will probably take five years or more before they are at the point of manufacturing leading edge chips with an acceptable yield, as it’s incredibly difficult to do that from scratch.
With Russia’s invasion of Ukraine, the world woke up to the fact that a major power could do something unexpected and invade a neighbouring country. People started to worry that China’s long-held intent to regain Taiwan might happen. Analysts began writing about what TSMC would do, with the assumption that plans would be put in place to prevent the 3nm production lines falling into Chinese hands. It’s not difficult to put them permanently out of use. Rational thought might question why TSMC would want to do that? There are several answers. Spite – to prevent the invader gaining access to their “Crown Jewels” technology. Politics – because it might be a negotiating asset. But the most persuasive reason is probably the fear that someone in the Pentagon has already got a missile aimed at taking out the whole plant. Once you start thinking about that, a pre-emptive, internal, surgical excision of a small part of the plant is far preferable to having everything blown away. It also leaves more of the skilled process staff alive, and I suspect that the US has plans to spirit them away in the event of a Chinese invasion, based on fond memories of their success with Werner von Braun and his rocket team after the Second World War.
Which brings us back to the Letter of Last Resort. Assuming that it is being written, what is the trigger to set it off? Is it the first Chinese military foot on Taiwanese soil, the first missile fired or a certain level of verbal threat? And what checks are there against false alarms? Because a false alarm that triggered it would be catastrophic.
Without TSMC’s leading edge production lines, the most up to date phones we’d be able to buy would probably be the iPhone 11 and Pixel 3. It’s debatable whether we’d be able to buy a 5G phone. Apple’s assertions that they “have a silicon advantage” and that consumers would tolerate higher prices would disappear, as might Apple itself, along with large chunks of the industry which rely on ever increasing features to support new hardware and services.
The invasion might never happen, but a mistake could. A twitchy finger could easily lead to a black swan event which would have a massive effect on the market, far in excess of any previous tech downturns. If TSMC’s process wasn’t as difficult as it is, they would already have competition and none of this would be a problem. But it is, and they don’t, which is why this is so critical,
While Congress has been happy to fork out hundreds of billions of dollars in the hope of bringing semiconductor manufacturing back to the US, whilst doing all they can to hinder progress in China’s chip industry, it’s not clear that they’ve considered the unintended consequences. If it all goes wrong and the black swans paddle in, it could put 5G on hold for five years, starting the largest tech downturn we’ve ever seen. It seems an opportune time for Netflix or Amazon to give David Greig a call and ask him to do a quick update to the Letter of Last Resort. Making everyone aware of the folly of the current policies in a populist one-off drama might be a good way to bring a little more sanity to the process.